The Definitive Guide to Coffee Futures

Despite the rise in popularity of soda and energy drinks, the world still gets the majority of its morning caffeine fix via coffee. That fact along with steadily rising global demand makes coffee one of the more interesting investments for traders and investors alike. And like much of the commodities complex, coffee is readily available as a traded futures contract [for more free commodity news and analysis subscribe to our free newsletter].

These contracts–which technically give the owner the obligation to buy a set amount of a commodity at a set price and at a set date in the future–can be bought and sold by anybody with a brokerage account, not just those requiring coffee as part of their operations.

They can be tricky to understand, but with some basic knowledge, anybody can become an “Aristocrat of Arabica” and enter the coffee market.

The Coffee Futures Market

As a member of the softs commodity group, coffee is a nearly $38 billion market. That actually makes it a larger marketplace than more “popular” commodities like silver. And like many of the softs, there’s plenty of variety under the subheading of coffee when it comes to pricing and how to invest. The main difference, however, is in the beans themselves.

Forget about single origin varietals, like Sumatra or Columbian – in terms of global coffee futures, it comes down to just two types of beans: Arabica & Robusta.

Arabica beans are considered a higher quality, with Brazil, Indonesia and Columbia making up the bulk of the world’s production. Arabica beans are most often the variety found in gourmet and premium coffees.
For example, Starbucks (SBUX) exclusively uses Arabica beans in its lattes and roasts. As such, Arabica beans often trade for a premium to their Robusta cousins. These beans tend to be more bitter and less palatable when it comes to taste, but they do contain about 50% more caffeine. Vietnam produces the most Robusta coffee in the world. Futures pricing for coffee reflects the two bean varietals [see also Coffee Futures Buoy Commodity Indexes in 2014].

And while you can technically buy coffee futures on exchanges like the Singapore Commodity Exchange (SICOM) or the Brazilian MERC (BM&F), there’s really only four places where U.S. investors can get their morning Joe fix: The NYMEX, the Intercontinental Exchange, the Tokyo Commodity Exchange (TOCOM) and the NYSE LIFFE. Each trades a different set of coffee futures contracts tied to the two bean types as well as the amount of coffee traded.

The Four Major Futures Players

The Intercontinental Exchange (ICE) contract is considered the world’s benchmark and is tied to Arabica prices. The contract–as designated by its ticker symbol KC–prices “physical delivery of exchange-grade green beans, from one of 19 countries of origin in a licensed warehouse to one of several ports in the U. S. and Europe.” Contracts are available for the months of March, May, July, September and December, and represent 37,500 pounds or 17 metric tons worth of coffee beans. On average just over 33,000 contracts trade hands each day.

The NYMEX’s coffee futures contracts (ticker KT) are virtually the same as the ICE’s – featuring the same available months as well as amount of coffee. The difference is that the NYMEX allows for virtual round the clock trading with Saturday being the only closed period for the exchange.

Absorbing the Tokyo Grain Exchange back in 2013, the Tokyo Commodity Exchange (TOCOM) allows investors to play both the Robusta and Arabica markets. A major distinction is that each contract is priced in yen, not U.S. dollars. That leads to potential currency appreciation/deprecation potential as well. The Arabica contract is traded in lot sizes of 50 bags or 3450 kilograms, while the Robusta contract is worth 5000 kilograms of coffee. Contracts are available for the months of January, March, May, July, September, and November.

Finally, offering exposure to the benchmark in Robusta pricing, the NYSE LIFFE (Ticker RC) offers contracts quoted in dollars per metric ton and are traded in lot sizes of 10 tons. Contracts are available for January, March, May, July, September, and November delivery. Volume for the LIFFE’s coffee contracts are pretty swift – currently averaging around 20,000 contracts traded each day. As you can see, that’s less than what Arabica trades and highlights Robusta’s “inferior” stature among coffee drinkers.

Additionally, options–which give you the right, not the obligation to buy–are available on many of these contracts, especially the ICE’s futures.

Things to Keep in Mind When Trading Coffee

As with much of the commodities complex, investors can use the previous coffee futures contracts to either hedge their own consumption or profit from rising global demand. Your morning latte will reflect rising futures prices, so buying coffee futures today helps lock–in rising prices. Additionally, you can sell futures short, if you think prices will fall.

At the same time, coffee growers can short futures to lock in a selling price for the coffee they produce. Meanwhile, businesses that require coffee can go long coffee to secure a purchase price for the commodity they need at a later date.

Currently, the world consumes around 145.8 million bags of coffee per year, with Europe and the United States leading the way. That’s slightly more than supplies of the bean, meaning that any disruptions to that supply can cause major price spikes. Not to mention, the growing appetite of Asia’s newfound middle class. As such, coffee remains a very a dynamic and often volatile market [see also The 5 Worst Commodities of 2012].

Controlling much of that volatility is the weather.

Floods, droughts, and extreme low/high temperatures in the major growing regions of Brazil, Columbia and Indonesia can often be a precursor to how coffee prices will react in the months ahead and farther-out futures contracts will represent that. Generally, most of the biggest moves in coffee prices happen because the trees are damaged from cold weather. The Southern hemisphere’s winter occurs during our summer. A freeze warning in Brazil will cause major spikes in the price of coffee futures. On average, a major freeze occurs roughly every five years or so. However, a more recent and persistent problem has been widespread droughts in Brazil during the summer, which has actually caused larger spikes and run-ups in the coffee KC contracts. Brazil dealt with major droughts in late 2010 and late 2013. The below chart illustrates the spikes:

Finally, as with all commodity trading, investors need to utilize a brokerage account that offers futures trading. That also includes being able to use margin debt. Most of the popular online brokerage firms now offer futures as part of their account options.

The Bottom Line

Just like many commodities, coffee offers traders and investors the chance to profit from a dynamic and volatile natural resource. It can be confusing at first, but with a little knowledge, it can be easy to begin trading coffee futures contracts.

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